Lesson 6 of 10 beginner

How to Apply for a Student Loan: Federal Loans First, Step by Step

Why the FAFSA is the application, how much you can borrow, and the two forms you sign before any money moves

Guess first

Pick an answer. You will see if you were right at the end of the lesson.

How do you apply for a federal Direct Subsidized or Unsubsidized Loan?

Open interactive version (quiz + challenge)

Real-world analogy

Borrowing for college is like filling a water tank from several taps. The free taps come first — grants, scholarships, family savings. The next tap, federal student loans, has rules written into law about price and pressure. Only when that tap runs dry do you open the last tap, a private loan, whose price depends on who you are. People who open the last tap first pay the most for the same water.

What is it?

To apply for a federal student loan, you do not fill in a separate loan application. You file the FAFSA (Lesson 7), your school uses it to build an aid offer, and you accept the loan amount you want in the school's portal. First-time federal borrowers then complete entrance counseling and sign a Master Promissory Note (MPN) on StudentAid.gov — the legal promise to repay. The money goes to the school first, which applies it to tuition and fees and refunds any remainder to you. The main federal loans for undergraduates are Direct Subsidized Loans (need-based; the government pays the interest while you are in school at least half-time) and Direct Unsubsidized Loans (not need-based; interest accrues from the day the money is paid out).

Real-world relevance

Federal limits are fixed by law, which makes them easy to plan around. A dependent undergraduate can borrow up to $5,500 in Direct Loans in the first year (no more than $3,500 of it subsidized), $6,500 in the second year and $7,500 in the third year and beyond, with an aggregate limit of $31,000. The interest rate for new undergraduate Direct Loans is reset every 1 July using the 10-year Treasury note auctioned in May plus 2.05 percentage points, capped at 8.25%, and it stays fixed for the life of that loan. An origination fee — 1.057% in recent years — is subtracted before the money reaches the school, but you repay the full amount. A 2025 federal law (Public Law 119-21) changed graduate and parent borrowing rules for loans made on or after 1 July 2026, so graduate students and parents should check StudentAid.gov for the limits in force for their award year.

Key points

The FAFSA is the loan application — Federal Direct Loans are only available through the FAFSA and your school's aid office. Any website charging to 'apply for federal student loans' is selling something you can do free.
Subsidized vs unsubsidized — Subsidized: for undergraduates with financial need; no interest charged while you are enrolled at least half-time, during the six-month grace period, and during deferment. Unsubsidized: available regardless of need; interest starts at disbursement and is added to the balance if unpaid.
Annual and lifetime limits — Dependent undergraduate: $5,500 / $6,500 / $7,500 by year (subsidized portion at most $3,500 / $4,500 / $5,500), aggregate $31,000. Independent students and dependents whose parents cannot get a PLUS loan have higher unsubsidized limits.
Rates are set by formula — Undergraduate Direct Loans: 10-year Treasury (May auction) + 2.05%, capped at 8.25%, fixed for that loan's life. Each new academic year's loans may have a different rate.
Entrance counseling and the MPN — First-time borrowers complete entrance counseling and sign the Master Promissory Note at StudentAid.gov. One MPN can cover loans for up to ten years at the same school, but each year you still choose how much to accept.
⚠️ Common misconception: you must take the full amount offered — The aid offer shows the maximum, not a requirement. You can accept less, or reduce or cancel a disbursement by contacting the aid office. Borrow for this year's real gap, not for the number on the letter.
Money goes to the school first — The school applies loan funds to tuition, fees and on-campus housing, then refunds any credit balance to you. That refund is still borrowed money accruing interest (for unsubsidized loans).
Private loans come last — Federal loans carry protections private loans usually do not: income-driven repayment, deferment and forbearance options, and discharge on death or total and permanent disability. Lesson 9 covers private loans for whatever gap remains.

Quick check

Answer from memory — scrolling up first makes it stick less.

What is the maximum total Direct Loan a dependent first-year undergraduate can borrow in one year?

On a Direct Subsidized Loan, who pays the interest while you are enrolled at least half-time?

Code example

STUDENT LOAN GAP, YEAR ONE (ILLUSTRATIVE)
========================================
Cost of attendance                $28,000
- Grants and scholarships          -$6,000
- Family savings / earnings       -$10,000
Remaining gap                     $12,000

FEDERAL DIRECT LOANS - DEPENDENT
FIRST-YEAR UNDERGRADUATE
  Annual Direct Loan limit          $5,500
  of which subsidized, at most      $3,500
  Year 2: $6,500  |  Year 3+: $7,500
  Aggregate (dependent)            $31,000

ACCEPT: $3,500 sub + $2,000 unsub
  Origination fee 1.057% deducted:
  5,500 x (1 - 0.01057) =       $5,441.87
  You repay the full                $5,500

STILL TO COVER
  12,000 - 5,500 =                  $6,500
  -> work-study, payment plan, cheaper
     housing, or private loan (Lesson 9)

RATE FORMULA (undergraduate Direct Loans)
  10-year Treasury, May auction + 2.05%
  Cap 8.25% | fixed for the life of loan

Line-by-line walkthrough

1. STEP 1 — FILE THE FAFSA. It is the only door to federal Direct Loans. Lesson 7 walks through the form itself.
2. STEP 2 — READ YOUR SCHOOL'S AID OFFER. Separate free money (grants, scholarships) from money you repay (loans) and work-study. Subtract the free money from the cost of attendance to find your real gap.
3. STEP 3 — ACCEPT ONLY WHAT YOU NEED. In the school's portal, accept subsidized loans first because the government covers their in-school interest, then unsubsidized for any remaining gap. You can accept less than offered.
4. STEP 4 — COMPLETE ENTRANCE COUNSELING. On StudentAid.gov, first-time borrowers complete a short session covering repayment, interest and your rights. Schools cannot disburse until it is done.
5. STEP 5 — SIGN THE MASTER PROMISSORY NOTE. Sign the MPN on StudentAid.gov with your StudentAid.gov account. This is the legal contract; read the sections on repayment and default.
6. STEP 6 — WATCH THE DISBURSEMENT AND KEEP RECORDS. The school applies the funds and refunds any credit balance. Note each loan's amount and rate; your StudentAid.gov dashboard lists every federal loan you have.

Spot the bug

Student's plan: 'I'll take a private loan first because the bank app approved me in five minutes, then do the FAFSA later if I need more. My offer says $5,500 in loans, so I have to take all of it. And the subsidized and unsubsidized loans are the same, so it doesn't matter which I accept.'

Need a hint?

Order of loans, whether the offer is mandatory, and what 'subsidized' actually means.

Show answer

FIRST, the order is backwards. Federal Direct Loans have rates set by law, income-driven repayment and discharge protections that private loans usually lack, and they are only available through the FAFSA — so file it first and use private loans only for the gap left after federal aid. SECOND, the aid offer is a maximum. A student can accept less, or reduce or cancel later through the aid office. THIRD, they are not the same: on a Direct Subsidized Loan the government pays the interest while the student is enrolled at least half-time, during the grace period and during deferment; on an unsubsidized loan interest accrues from disbursement. Accept subsidized first.

Explain like I'm 5

College costs a lot. First you use free money, like grants and help from family. If that is not enough, the government lends money with fair rules — but you only get it by filling in one free form called the FAFSA. You can borrow less than they offer. You sign a promise to pay it back. Only if there is still a gap do you ask a bank, which usually has stricter rules.

Fun fact

Federal student lending at scale began with the National Defense Education Act of 1958, passed after the Soviet Union launched Sputnik. Its loans were designed to push more students into science, mathematics and foreign languages — and some could be partly forgiven for those who became teachers.

Hands-on challenge

Write your own year-one gap table. Start from your school's published cost of attendance, subtract every grant and scholarship and what your family can pay, and see what is left. Then fill in the federal Direct Loan amounts you are eligible for, apply a 1.057% origination fee, and write down any gap that remains.

More resources

Subsidized and Unsubsidized Loans (Federal Student Aid)
Master Promissory Note (MPN) and entrance counseling (Federal Student Aid)
Federal student loan interest rates and fees (Federal Student Aid)

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